Short:

Wheres the insulin?

DXCM is hyperglycemic.
Ticker: DXCM
Price Target: $20
Return: 70%

Marc T. Grow, CFA

Columbia Business School

DXCM Short- Summary

Investment Thesis:
1
2

Market UnderesXmaXng CompeXXon

DXCM Summary
Price 5/2/16:

$64.38

52 Week Range:

$103.29 - $47.92

Shares Outstanding:
Market Cap:

OveresXmaXng Revenue Opportunity

Net Cash:
Enterprise Value:
2016 Revenue EsXmate:

Aggressive ValuaXon

83mm
$5,371mm
$105mm
$5,266mm
$464mm

EV / 2016 Revenue:

11.4x

Short Interest:

3.3%

Cost to Borrow:

GC

A"rac&ve 3x Upside / Downside Ra&o

Company & Industry Overview

DXCM is a medical device company that develops and manufactures conXnuous
glucose monitoring (CGM) systems for type 1 diabeXcs
US Diabetes Market
Insulin Pump Therapy

Monitoring
Devices:
CGMs
Blood Glucose
Monitors
Insulin Delivery:
Pump Therapy
InjecXons

PaXents use
monitoring
devices to
measure
glucose levels


Then use this
informaXon to
dose insulin

Very few type 2 pa&ents monitor glucose levels

Sources: Factset, Capital IQ, American Diabetes AssociaXon (ADA)

CGM Sensor
Transmi`er
(DXCM, MDT, ABT)
Only
integrated
device

(MDT, PODD,
JNJ, TNDM)
Insulin Pump &
InserXon Set

T1D Represents a Small Percentage and is Limited to Popula&on Growth

Dexcom Today
Market Share Leader
(70% of CGMs)
Technology Advantage
(Most Accurate CGM)
Revenue Growth
(5yr Rev CAGR = 53%)

Price/Sales
2016: 11x

Sources: Factset, Capital IQ, IR PresentaXons

Disclaimer: Past Performance Does Not Guarantee Future Returns

CompeGGon is Coming
Eversense
Lowest Annual Cost

Free OpXon: 90
day implantable

Freestyle Libre
Single InserXon Site

KEY CATALYSTS

MiniMed 640g

MiniMed 670g

G6 Mobile

Sources: IR PresentaXons, Company Filings

2016

2017

2018

DXCM Will Lose Share Over the Next 12-18 Months

Share Loss Drivers

CGM Market Share Forecast

Compe&&on

Eroding Market Share

Medtronic
integrated device
Developing single
inserXon site
technology
Abbo` Labs
success in EU with
Freestyle Libre
Senseonics 90 day
implantable device
Applied for CE
Mark
Expected 2017

Sources: IR PresentaXons, Company Filings, EsXmates

But the Market Doesnt Think So

Overstated AdopGon
US Type 1 paXents:
1,200,000

Enterprise Value Today:

$5.3b
100% T1
Adop&on

Annual CGM Cost:

$3,250

Type 1 AdopXon 100%: $3.9b

Long-term BULL CASE

L/T Base Case 50%: $2.0b

X
CGM AdopXon Rate:
15%

50% T1
Adop&on
2015 Market Sales 15%: $585m

Total market sales (2015):

$585mm

Dexcom 2015 Sales: $402m

DXCM 69%

Sources: Investor RelaXons, EsXmates, ADA

Long-term CGM Adop&on is Overdone

AdopGon Headwinds
Type 1 Pa&ents x CGM Adop&on = Total Addressable Market
NOT EVERYONE WANTS TO BE PLUGGED INTO A DEVICE

ADOPTION
Growth

I decided to quit using my CGM because of the hassle of calibraXng [with nger pricks] and the alarms.

Type 1 pa(ent and former CGM user

Theres a meaningful populaXon of Type 1s who do not want to be plugged into a device.

Nurse Educator

NOT EVERYONE CAN OR WANTS TO PAY FOR IT

Many Type 1s follow consistent regiments that allow them to know their levels with li`le variability,
CGMs can be used every so ooen for calibraXon"

Former VP of Insulet

NOT EVERYONE IS CANDIDATE FOR CGM & PUMP THERAPY

These devices require acXve management and signicant training, not everyone is an ideal candidate







Diabetes America Execu(ve

CGM isnt for Everyone

Falling Annual RPU Sensor UGlizaGon

Annual Revenue Per User

Primary Research
Actual life > FDA
recommended life
1. Users wear sensors un&l
they fall o
2. Sensors get more
accurate with Xme (no
incen&ve to change)

Arrives
2017

Should also expect pricing

pressure per sensor from
payers

Sources: IR PresentaXons, Company Filings

Next Gen Sensors Last Longer, Driving Down Annual RPU

Insiders Are Cashing OUT

Insider Ac&vity
Insider Ac&vity:
Since 2013: 5.6mm+ shares/awards
sold
(~4% of diluted CSO) for $305mm

10 year cumulaXve net loss $465mm

Insiders currently own 1.9% CSO

Source: Capital IQ

Consistent Insider Selling

10

ValuaGon
2016 Summary
US Type 1 PopulaXon

DXCM Share Price & Valua&on

1.2mm

AdopXon

18%

Type 1 CGM users

216k

DXCM Market Share

65%

DXCM Users

140k

Annual Revenue Per User

$3,300

Total Revenue

$464mm

Sales Mul&ple

4x

Value

$1.8b

Value Per Share

$20.00

Near-term protability & cash ow

mulXples are not meaningful
Sources: IR PresentaXons, Company Filings, ADA, Capital IQ, Factset

Long-term Assump&ons

Bull Case

Bear Case

AdopXon

65%

50%

DXCM Market Share

70%

30%

Pricing AppreciaXon

3%

Flat

A"rac&ve Risk / Reward

11

Revenue Bridge
Primary
Primary RResearch
esearch:
DXCM benets from increased
adopXon but theres a ceiling
1.

CGM adopXon isnt likely to

exceed that of pumps (35%)

2.

Further adopXon would have

to come with meaningful
price concessions

Variant View:
Sensor

Street MTG

Pricing
U&liza&on
Source: Company Filings

Market Share, Pricing, and U&liza&on Represent Revenue Headwinds

12

Primary Research
Type 1 PaXents
Medical
Professionals
Industry Experts
Investors

>15 type 1 diabeXcs who own CGM systems

2 type 1 diabeXcs without CGM systems
A`ended JDRF TypeOneNaXon Summit on 11/7/2015
Nurse Educator with type 1
ExecuXve of Diabetes America
Elementary School Nurse with type 1
Former employee of Dexcom & Medtronic
Sr. VP at Blue Cross
Academic Researcher
Former VP of Insulet
VC investor of Dexcom
Former Director of Dexcom
13

Key Risks
Risk
1
2
3

Mi&ga&on

Realized price increases

over Xme

More likely that pricing per sensor

would stay at and avg. sensor life
extends further driving down RPU

Faster adopXon of CGM

technology

Next gen MDT device with a single

inserXon site & ABTs US release
will take share of CGM growth

Buyout risk

Historical mulXples materially lower

than today and new technologies
threaten standard of monitoring
14

Summary MulGple Ways to Win

Drivers

Outlook

NTM

Type 1 PaXents
x
AdopXon
x
Market Share
x
UXlizaXon
x
Pricing
=
Revenue

Limited to populaXon growth

x
Lower than expected
x
New compeXXon
x
Longer lasXng sensors
x
Pressure from payers
=
MISS

1.2mm
x
18%
x
65%
x
10 Day Avg.
x
$70
=
$464mm

Sources: IR PresentaXons, Company Filings, ADA

Priced for Perfec&on, DXCM Presents Mul&ple Ways to WIN

EV/
Sales

11x

4x
15

 Appendix

Salesforce Disadvantage
Primary Research

Es&mated Salesforce Representa&ves

MDT reps are already on-site and can provide a suite of

diabeXc therapy products
Success is closely Xed to the coverage and eciency of
compeXng sales forces

MDT 4.4x
Advantage

I chose Medtronic for CGM because they were the only one
with a presence in my endocrines oce Type 1 pa(ent
Everyone I know is using Medtronic, I think they are the only
company with sales reps in this area Type 1 pa(ent

Sources: IR PresentaXons, Company Filings

Medtronic Has A Substan&al Salesforce Advantage

17

Historical Price & ValuaGon

DXCM 5yr Chart & P/Sales Mul&ples

Peer Group Mul&ple: 4x

Sources: IR PresentaXons, EsXmates, Capital IQ, Factset

Signicant Risk of De-Ra&ng

18

CompeGGon
Medtronic

Senseonics

Abbo" Labs

Dexcom

Current Model:

MiniMed 530G

Applied for CE Mark

In EU only

G5 Mobile

Next Gen:

MiniMed 640G

Eversense

Freesyle Libre

G6

Mid 2016

2017

Mid 2016

2017

Annual Cost:

$3,000

$1,800

$3,500

Sensor Life:

7 days

90 days

14 days

7 days

(60% -70%)

In EU only

CGM only

Expected Release:

Pump Market Share:

Sources: IR PresentaXons, Company Filings

19

UGlizaGon CalculaGon
Sensor Economics
Revenue Based on FDA sensor life
Sensors Per Year
Sensor Price
Expected Annual Sensor RPU

7 Day Sensor

10 Day Sensor - $70

10 Day Sensor - $60

Calcula&on

52
$70
$3,650

37
$70
$2,555

37
$60
$2,190

A
B
C = A*B

Revenue Based on Actual Sensor life

EsXmate of Actual Sensors Used/Year
UXlizaXon

34

152%

152%

152%

E = A/D

Sensors Used Per Year

34

24

24

F = A/E

Sensor Price

$70

$70

$60

$2,380

$1,680

$1,440

G = F*B

(29%)

(39%)

Annual Sensor Revenue

Per User Decline
Sources: IR PresentaXons, Company Filings, EsXmates

20

Comparables Table
Company

Price

Market
Capitalization

Enterprise
Value

2015

SALES
2016

2017

2015

EBITDA
2016

2017

Medtronic Plc
Insulet Corporation
Tandem Diabetes Care, Inc.
Abbott Laboratories

$79.15
$33.30
$11.13
$38.90

$110,892
$1,902
$338
$57,309

$131,115
$1,966
$311
$60,719

$20,261
$324
$73
$20,405

$28,723
$344
$111
$20,903

$29,612
$405
$150
$22,264

$6,034
($36)
($64)
$4,355

$9,719
($7)
($55)
$5,214

$10,224
$5
($40)
$5,614

DexCom, Inc.

$64.38

$5,371

$5,025

$402

$464

$531

($46)

($2)

$92

Company
Medtronic Plc
Insulet Corporation
Tandem Diabetes Care, Inc.
Abbott Laboratories

Price
$79.15
$33.30
$11.13
$38.90

Mean
Median
DexCom, Inc.
Difference (Mean)

$64.38

2015

PRICE / SALES
2016

2017

2015

EV / EBITDA
2016

2017

Gross
Margin

SALES
CAGR

6.5x
6.1x
4.3x
3.0x

4.6x
5.7x
2.8x
2.9x

4.4x
4.9x
2.1x
2.7x

21.7x
nmf
nmf
13.9x

13.5x
nmf
nmf
11.6x

12.8x
nmf
nmf
10.8x

65.6%
45.7%
36.5%
53.7%

20.9%
11.7%
43.4%
4.5%

4.9x
5.2x

4.0x
3.7x

3.5x
3.6x

17.8x
17.8x

12.6x
12.6x

11.8x
11.8x

50.4%
49.7%

20.1%
16.3%

12.5x

10.8x

9.5x

nmf

nmf

nmf

71.5%

14.9%

7.6x

6.8x

5.9x

nmf

nmf

nmf

Sources: Factset, EsXmates

21

Short:
Wheres the insulin?
DXCM is hyperglycemic.
Ticker: DXCM
Price Target: $20
Return: 70%

Marc T. Grow CFA

Columbia Business School